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Monday, June 19, 2017

Long Meandering Commentary: Sector Rotation, Capitulation -- June 19, 2017

Disclaimer: this is not an investment site. Do not make any investment, financial, job, travel, or relationship decisions based on what you read here or think you may have read here.

I first noted this on November 23, 2016: gasoline demand "not particularly comforting."  At the time I do not recall this decline in gasoline demand being noted by the mainstream business media.


Since that post it has been pointed out frequently that US gasoline demand is weak but only recently has the mainstream press picked up on it.

The second thing that was picked up early by the blog: the OPEC cuts weren't cutting it. I don't know if this was the first post on this subject, but it was certainly one of the earlier posts (April 28, 2017). At the time, analysts were still optimistic about the "cut" buying into Saudi's public relations machine.

It was about this time that it was clear that regardless whether Saudi Arabia was cutting production or not (wink, wink), in fact, it was emptying its storage tanks and continuing to flood the US with oil (see more below). (Wow, that's a grammatically awful sentence but I've tried to correct it several times, and I've given up. I need to move on.)

Back to Saudi's production cuts (wink, wink) and US imports: I gave that a "Saudi Shenanigans" tag.

From twitter, 58 minutes ago (as of 6:32 a.m.):

Finally, the mainstream business media -- starting about two weeks ago -- has started talking about this: US gasoline demand is concerning; and, OPEC cuts aren't working.

Today, Rigzone addresses those two issues:
The sustained fall in oil prices over the past week is indicative of the consensus view that the 1.8 million barrel per day coordinated output cut among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC is not deep enough to rebalance global oil markets in 2017, or even in 2018.
Also contributing to this bearish outlook are serious concerns around U.S. gasoline demand. In its Weekly Petroleum Status Report on Wednesday, the U.S. Energy Information Agency (EIA) showed a surprise build to gasoline stocks for the week ending June 9.
The report also showed that gasoline demand in the United States had fallen week over week and was 5 percent lower than during the same period in 2016. Over the last four-week period, total motor gasoline consumption in the United States averaged 9.5 million barrels per day, which was 1.2 percent lower than the same period last year. OPEC cuts not cutting it and US gasoline demand not cutting it.
Note again, from the lede:
... the 1.8 million barrel per day coordinated output cut among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC is not deep enough to rebalance global oil markets in 2017, or even in 2018...Over the last four-week period, total motor gasoline consumption in the United States averaged 9.5 million barrels per day, which was 1.2 percent lower than the same period last year...
I think that's the first time I've seen that in the mainstream business media so explicitly, that at the current rate of US crude oil supply / demand, "re-balancing" is not going to occur any time soon.

I started tracking this several months ago and have posted this chart (update: methodology was wrong in some parts of this table; it has been updated and corrected at this post):) several times showing how long it will take to "re-balance":

Week
Date
Drawdown
Storage
Weeks to RB
Week 0
Apr 26, 2017

529
180
Week 1
May 3, 2017
0.9
528
178
Week 2
May 10, 2017
6
522
29
Week 3
May 17, 2017
1.8
520.2
95
Week 4
May 24, 2017
4.4
515.8
38
Week 5
May 31, 2017
6.4
509.9
41
Week 6
June 7, 2017
-3.3
513.2
60
Week 7
June 14, 2017
1.7
511.5
63

By the way, when the mainstream business media talks about "re-balancing," they are talking about getting back to the "5-year-average," whatever that is. I don't know if I've seen the "5-year-average" noted. Whatever it is, it's skewed by the Saudi surge from 2014 to 2016, the first of two trillion-dollar mistakes by the Saudis. In fact, for meaningful "re-balancing" to occur and a return to more bullish crude oil prices we need to see US crude oil supplies fall back to the "historical average" -- a 21-day supply or about 350 million bbls.

Right now, the rate of drawdown, averaging 2.6 million bbls/week since April 26, 2017, means that it will take 63 weeks to "re-balance." That would be late 2018.

Now, Rigzone, today, is suggesting that "re-balancing" won't even happen in 2018. That's as far as I read. Let's go back and see if the writer supplies a "new date."

Nope: no new date is given when "re-balancing" might be reached.

In fact it's worse. Look at this:
Also weighing on prices was Wednesday’s report from the International Energy Agency (IEA), which projected 2018 oil supply from non-OPEC producers to grow by 1.5 million barrels per day (almost twice the increase estimated for 2017).
The significant uptick in estimated production growth for 2018 is due mostly to rising expected production from U.S. tight oil formations. The IEA estimated that demand would grow by 1.4 million barrels a day in 2018 – largely from China and India.
In case you missed it, based on estimates:
  • supply will grow by 1.5 million bopd
  • demand will grow by 1.4 million bopd
Does anyone see the problem?

Two other things are also noted in the Rigzone article, both of which I pointed out some time ago:
  • Saudi Arabia / OPEC made a huge mistake underestimating the amount of oil Nigeria and Libya could bring to the market (and exempting both countries from the agreement to cut OPEC production);
  • Saudi Arabia under-estimating US shale oil resiliency and ability to respond quickly (many analysts have said it would take months for US shale to ramp up; I've always thought it would only take weeks --  DUCs, choking back, amount of infrastructure that has been put in place since 2007)
Perhaps most interesting is the allusion to "Saudi Shenanigans." From the linked Rigzone article:
Saudi Arabia has committed to reducing its exports to the United States to under 1 million barrels per day during the summer months. In addition, the Kingdom has increased its pricing to Asian customers of its crude, which should have the effect of lowering export volumes.
Whether the move to decrease exports to the United States is an attempt at sleight of hand to convince oil markets that crude inventories are draining is up for debate. It should be noted that most crude traders essentially use U.S. crude inventory levels as a proxy for the health of global crude markets due to the availability and quality of data.
Many in the market believe that the Saudis may not be reducing its overall production levels, and could in fact, possibly be using crude that was otherwise destined for the United States as feedstock for power generation in-country – when demand for air-conditioning surges during the summer months.
Remember: Saudi Arabia HAS to cut imports to the US during the summer months -- all things being equal -- if  the kingdom cuts production (wink, wink). Saudi has decreased its crude oil inventories significantly and Saudi's domestic consumption of oil surges in the summer months to provide electricity to run air conditioners.

So, where does this lead us?

Disclaimer: this is not an investment site. Do not make any investment, financial, travel, job, or relationship decisions based on what you read at the blog or what you may have thought you read at the blog.

So, for investors, where does this lead us? The word I have not yet seen in the mainstream business press is "capitulation."

Share prices for oil companies and oil service companies have fallen dramatically since 2014, but the fall has been fairly orderly.

But the Amazon-Whole Foods announcement may accelerate what investment analysts call "sector rotation," when a shift from one sector, let's say the retail sector, to another sector, let's say the tech sector occurs.

Hold that thought.

Generally, oil prices and the US stock market tend to track each other fairly closely. Not always, but generally. Some months ago the price of crude oil and the stock market seemed to track each other. But about a month ago (maybe earlier, I forget) the price of crude oil and the stock market diverged. It's been mentioned rarely on CNBC, that divergence.

It's no longer mentioned.

Today, futures are surging and if everything holds new records will be set -- possibly on all three major indices and yet it looks like WTI will fall again.

Are you still holding that thought? Two things come to mind:
  • capitulation; and,
  • sector rotation
I think I will stop here. I think most folks can connect the dots. Except to say I can hardly wait for the market to open today.

Futures are still up nicely.

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